The Zacks Analyst Blog Highlights: Ventas, HCP, McDonald's, Wal-Mart Stores and Walgreen

 The Zacks Analyst Blog Highlights: Ventas, HCP, McDonald's, Wal-Mart Stores
                                 and Walgreen

PR Newswire

CHICAGO, June 27, 2013

CHICAGO, June 27, 2013 /PRNewswire/ --Zacks.com announces the list of stocks
featured in the Analyst Blog. Every day the Zacks Equity Research analysts
discuss the latest news and events impacting stocks and the financial markets.
Stocks recently featured in the blog include Ventas Inc. (NYSE:VTR-Free
Report), HCP Inc. (NYSE:HCP-Free Report), McDonald's Corp. (NYSE:MCD-Free
Report), Wal-Mart Stores Inc. (NYSE:WMT-Free Report) and Walgreen Co.
(NYSE:WAG-Free Report).

(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of
the Day pick for free.

Here are highlights from Wednesday's Analyst Blog:

QE Tapering: Threat for Net-Leased REITs?

Sending the global markets in a tizzy, the Fed recently announced its plans to
gradually phase out the $85-billion-monthly-bond purchase program by 2014 for
the revival of the economy. Although the announcement indicated an overall
improvement in the U.S. financial system and slammed the need for any
additional stimulus, it unruffled the dynamics of several industries, the
primary among them being net-leased REITs (real estate investment trusts).

This came as a shocking news to some, as the continued adherence to
zero-interest policy by the Fed had helped the U.S. housing market stage a
recovery from the downturn by attracting new buyers and allowing existing
house owners to refinance the mortgages at a low rate. The low interest rates
might have also propelled some investors to consider REITs that offer
comparatively high yields.

Will the Fed's sudden decision to catapult the stimulus put a hole in the
housing recovery? Or will this add to the debate put forth in our earlier
observation, REITs Breakthrough: Real or Bubble? Let's follow the arguments.

A Niche Identity

Net-leased REITs own free-standing buildings that are typically leased on a
long-term basis (usually 15 to 20 years) to credit-worthy tenants who
generally have the wherewithal to withstand the volatility in the market. In
addition to rents, these tenants pay a part of the property expenses that
would otherwise be borne by the owners.

Healthcare REITs in particular leass their facilities under "triple-net"
master lease agreements, in which the tenant pays all taxes, insurance and
maintenance for the properties, in addition to rent. This insulates healthcare
REITs like Ventas Inc. (NYSE:VTR-Free Report) and HCP Inc. (NYSE:HCP-Free
Report) from short-term market swings that might adversely affect the
operations of a particular facility, providing a steady revenue stream with
dependable cash flows.

During our challenging macroeconomic period, net-leased property owners like
McDonald's Corp. (NYSE:MCD-Free Report), Wal-Mart Stores Inc. (NYSE:WMT-Free
Report) and Walgreen Co. (NYSE:WAG-Free Report) are unlikely to terminate the
lease agreements due to their sound balance sheets and focus on
recession-proof items. Even if the leases were terminated under extraordinary
situations, strategic infill locations and intrinsic value of a tangible asset
would make it easier to re-lease these facilities. Consequently, net-leased
REITs operated at the prime of the market, generating a healthy yield in the
form of dividends.

The Shift in Balance

REITs are largely dependent on the capital markets for their inorganic and
organic growth as the U.S. law requires them to distribute 90% of their annual
taxable income in the form of dividends to shareholders. As interest rates
kept extremely low, REITs have managed to raise capital to pay off debt, owing
to a large inflow of funds as institutional investors allocated more 'dry
powder' to the industry, making them an increasingly attractive investment
proposition.

Importantly, during the downturn, REITs were able to acquire properties from
highly-leveraged investors at deeply discounted prices. This also enabled them
to add premium high-return assets to their portfolios and thereby provide
attractive risk-adjusted returns to the investors.

With a healthy dividend yield in the range of 4.4% to 6.4%, these net-leased
REITs experienced a spurt in stock prices from early 2012 to mid-May 2013.
According to a Wall Street report, the stock prices of the five largest
net-leased REITs surged by an astounding 57% - 103% during this period,
compared to a 42.5% rise in the Dow Jones All-REIT Equity Index as calculated
on a total return basis. However, as the market started receiving feelers
about a possible change in interest rates, these stocks fell by 11% to 18.5%.

Most of the investors gained a high ROI by putting their money in net-leased
REITs as they leveraged their low cost of capital due to minimal interest
rates and returned significant cash to shareholders in the form of dividends
or share repurchases. However, with fears of rising interest rates, investors
tend to leave capital-sensitive net-leased REITs and park their money instead
on other avenues that promise comparatively higher yields.

The Road Ahead

Is this the end of the road for net-leased REITs, or are they standing at the
cross-roads? To find out, let us first take the example of National Retail,
which has earned the unique reputation of being one of only four publicly
traded REITs and 104 publicly traded companies in America to have increased
dividends for 23 or more consecutive years. The average annual total return to
shareholders has clocked an impressive 13.3% over the past 20 years.

On the other hand, Realty Income, which owns 3,500 properties across the U.S.,
has paid 516 consecutive common stock monthly dividends throughout its 44-year
operating history and increased the dividend 72 times since its listing in
1994.

Realty Income has generated a 7.4% average annual dividend return since 1995
through year-end 2012, with a 142.1% dividend growth since 1994 as of May 30,
2013. The stock had a 4.8% yield based on $45.35 stock price and $2.175
annualized dividend per share as on March 31, 2013 vis-à-vis a 10-year
Treasury yield of 1.87% on that date.

All these factors signify the inherent strength of net-leased REITs. Probably
due to this, experts opine that the beleaguered stocks are down but not out
yet. In addition, they still believe that REITs' shares are trading a premium
to their net-asset values and they can issue new shares at favorable prices to
buy properties and boost yields in the future. Only time will tell whether
such investor confidence is justifiable or not.

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